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Reese's Leases

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by

Simin Guo

on 1 May 2014

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Transcript of Reese's Leases

REESE'S LEASES
DID WE VIOLATE ANY RULE?
ARE WE ASSISTING IN THE FRAUDULENT CONDUCT?
WHAT HAPPENED?
Rule 1.2
Scope of Representation and Allocation of Authority Between Client and Lawyer

(d) A lawyer
shall not
counsel a client to engage, or
assist a client, in conduct
that lawyer
knows
is criminal or
fraudulent
, but a lawyer
may discuss the legal consequences
of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.
WHAT IS FRAUD?


We formed a boutique law firm (three partners). Our main client is Executive Leasing Services (ELS). Represents 60% of our income each year.

Their business:
Lease luxury cars to corporations for use by corporate managers. Borrowed $$ from banks to purchase cars and leased cars to customers. Promise of income under the leases used as collateral to request more loans.
Our legal work:
Draft lease agreements between ELS & customers
Negotiate leases between ELS & customers
Legal opinions for benefit of bank
Including in legal opinion that ELS owned the cars that it was leasing
We noticed problems:
ELS charged 15% less than other competitors;
Income from leases not enough to repay loans;
Call from accountant informing false leases to borrow more $$ to purchase more cars;
Met with clients asking the truth about this information.
Conversation with our client:

“We modify the numbers of existing leases, and generate some new leases.”

“[W]e just add digits to the numbers in genuine leases to create what appear to be new leases. We always make it appear that the new leases are coming from existing customers. We just copy their signatures onto the new leases."

"I know its risky. Paula and I have been worried all along. Last month after we got that last loan we decided it was enough. We won’t fiddle with any more leases, I promise.”
Rule 1.0
: TERMINOLOGY
(d) "Fraud" or "fraudulent" denotes conduct that (1)
is fraudulent under the substantive or procedural law of the applicable jurisdiction
and (2)
has a purpose to deceive
.

Rule 1.0, Comment 5

When used in these Rules, the terms "fraud" or "fraudulent" refer to conduct that is characterized as such under the substantive or procedural law of the applicable jurisdiction and has a purpose to deceive. This does not include merely negligent misrepresentation or negligent failure to apprise another of relevant information. For purposes of these Rules,
it is not necessary that anyone has suffered damages or relied on the misrepresentation or failure to inform
.
ABA Model Rules
Tort Law
: Fraudulent misrepresentation

One who
fraudulently
makes a
misrepresentation
of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for
pecuniary loss
caused to him by his justifiable reliance upon the misrepresentation.
DID WE KNOW THE CONDUCT WAS FRAUD?
Did we exercise the prevailing standard of care to discern client fraud?
If a lawyer does not exercise the prevailing standard of care to discern client fraud, the lawyer might be liable for negligence to those injured by the fraud
Can it be
inferred
from the circumstances that we did know that the legal assistance would be used for fraudulent purposes?
See
Rule 1.0(f)
worked with close friends who were committing the ELS fraud
noticed that ELS was charging customers less than other firms, and that income from the leases were often less than repayment
wondered why the bank kept ELS larger and larger loans
WHAT DO WE NEED TO DO?
Rule 1.2, Comment 10
When the client's course of action
has already begun and is continuing
, the lawyer's responsibility is especially delicate. The lawyer is required to
avoid
assisting the client, for example, by
drafting or delivering documents that the lawyer knows are fraudulent
or by suggesting how the wrongdoing might be concealed. A lawyer
may not continue assisting
a client in conduct that the lawyer originally supposed was legally proper but then discovers is criminal or fraudulent. The lawyer must, therefore, withdraw from the representation of the client in the matter. See Rule 1.16(a). In some cases,
withdrawal alone might be insufficient
. It may be necessary for the lawyer to give notice of the fact of withdrawal and to disaffirm any opinion, document, affirmation or the like. See Rule 4.1.
Rule 1.16
(a) Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if:

(1) the representation will result in violation of the rules of professional conduct or other law
Do we need to withdraw?
Is withdrawal alone enough?
Rule 4.1
:
In the course of representing a client a lawyer shall not knowingly:

(a) make a false statement of material fact or law to a third person; or

(b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.
Rule 4.1, Comment 3
:
Ordinarily, a lawyer can avoid assisting a client’s crime or fraud by withdrawing from the representation. Sometimes it may be necessary for the lawyer to give notice of the fact of withdrawal and to disaffirm an opinion, document, affirmation or the like. In extreme cases, substantive law may require a lawyer to disclose information relating to the representation to avoid being deemed to have assisted the client’s crime or fraud. If the lawyer can avoid assisting a client’s crime or fraud only by disclosing this information, then under paragraph (b) the lawyer is required to do so, unless the disclosure is prohibited by Rule 1.6.
DO WE NEED TO DISCLOSE? MAY WE DISCLOSE?
Rule 1.6
: CONFIDENTIALITY OF INFORMATION
(a) A lawyer
shall not
reveal information relating to the representation of a client
unless
the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation,
or the disclosure is permitted by paragraph (b).
(b) A lawyer
may
reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:
(2) to
prevent the client
from committing a crime or fraud that is
reasonably certain to result in substantial injury
to the
financial interests
or property of another and in furtherance of which the client
has used or is using the lawyer's services
;
(3) to
prevent, mitigate or rectify
substantial injury to the
financial interests
or property
of another
that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client
has used
the lawyer's services;
Does this constitute financial injury to the bank or to the customers?

We don’t know if fraud will cause substantial injury to financial interests of the bank.
The bank is giving $$ with false documents.
But ELS may be able to repay the loans.
Does “another” include the customers?
LAST RESORTS
CAN WE USE CLIENT'S CONFIDENTIAL INFORMATION TO PROTECT OUR INTERESTS?
OTHER ETHICAL RULES ALLOW OR REQUIRE LAWYERS TO REVEAL CLIENT'S FRAUDULENT CONDUCT?
Rule 1.6(b)(5)
: allows lawyer to reveal confidential information to the “extent necessary” to:
Establish a claim against a client for unpaid fees
Defend against a claim of malpractice or other claim of civil liability against the lawyer
Defend against a disciplinary proceeding
Defend against a criminal charge.
YES!
In our case: if Bank finds out and files a suit against us and our clients, we might choose to reveal. Limitations?

Yes, limit revelation’s scope and limit dissemination of information.
When is revelation allowed?

Don't need to wait for formal proceedings to reveal. May reveal to prevent action.
“[L]awyer’s right to respond arises when an assertion of such complicity [in wrongdoing] has been made. Paragraph (b)(5) does not require lawyer to await the commencement of an action or proceeding that charges such complicity, so that defense may be established by responding directly to a third party who has made such an assertion. The right to defend also applies, where a proceeding has been commenced.”
Rule 8.4(c): Dishonesty
Prohibits lawyers from engaging in any dishonesty, fraud, deceit or misrepresentation

Rule 3.3: Duty to reveal client crimes or frauds to tribunals
Restatement Third, The Law Governing Lawyers: Similar Standards

59: Defines Confidential Client Information
60: Duty to safeguard Confidential Client Information
61: Disclose only to advance client interests
62: Disclose information only with client consent
63: Disclose information required by law
64: Disclose for lawyer’s self-defense
65: Disclose in a compensation dispute
66: Disclose to prevent death or serious bodily harm
67: Disclose to mitigate substantial financial loss
Group 3: Melisa Glorighian, Colin Barry, Abigail Bunce, Simin Guo, Sneha Dhanapal
Other Legal Standards?
Contract Law
: When A Misrepresentation Makes A Contract: Voidable

If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.
If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction.
Corporate Law

Enron case and Sarbanes Oxley Section 307
: Company’s officers, lawyers, and accountants overstated company’s earnings, pocketed $$ and caused massive losses. Accountants: destroyed documents to prevent SEC from finding them. Financial fraud.

Section 307
: Attorney Conduct Rule: disclosure rules for professionals (including lawyers) who practice before the Commission & who become aware of client’s fraud: report securities fraud to senior executives.
Rule 1.13
: ORGANIZATION AS CLIENT: (b)
lawyer for an organization
knows
that officer, employee or person associated with organization is
engaged in action, intends to act or refuses to act
in a matter related to the representation that is violation of a legal obligation to the organization, or
violation of law
that
reasonably might be imputed
to the organization, likely to result in
substantial injury
. Unless lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, lawyer shall
refer the matter to higher authority
of the organization . . .
The ABA Ethical Committee noted in an opinion interpreting Rule 3.3:

“the language ‘assisting a criminal or fraudulent act by the client’ is not limited to criminal law concepts of aiding and abetting or subornation. Rather, it seems clear that this language is intended to guide the conduct of the lawyer as an officer of the court as a prophylactic measure to protect against client perjury contaminating the judicial process.”
Restatement provides examples:
advising a client to destroy documents
advising a client to conceal the identity of the owners of a business when applying for a liquor license
advising a client to leave the state to avoid prosecution
Were our services used to commit the fraud?

Recall that we:
wrote opinion letters for the benefit of the bank
drafted lease agreements with customers

Fraudulent documents were drafted and delivered by the client, not by the attorney.

If our services were not used to commit the fraud, we are not subject to the exception in 1.6(b) and may NOT disclose.
If fraud is continuing:
Rule 1.6(b)(2)

A lawyer may reveal information . . .
to prevent the client from committing a crime or fraud
that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client
has used or is using
the lawyer’s services;
Is the fraud continuing or in the past?
If fraud is past:
Rule 1.6(b)(3)
A lawyer
may
reveal information . . .
to prevent, mitigate or rectify
substantial injury to the
financial interests
or property
of another
that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client
has used the lawyer’s services
Reveal the fraud to the bank or the district attorney if Reese refuses to do so?
Do not reveal the fraud but stop representing ELS?
Do not reveal the fraud and continue to represent ELS, taking more care that the company does not engage in future fraud?

Keeping in mind that your own livelihood and the livelihoods of your partners and staff members depend on keeping ELS afloat, what would you actually do in this situation?
Seek outside ethical advice (
Rule 1.6(b)(4)
)
Remember that following ethical rules does not shield you from civil liability
Look at rules that allow you to protect your own interests
WHAT WOULD YOU DO?
THANKS!
Rule 1.6 presents 3 questions:

Were our services used to commit the fraud?

Is the fraud continuing or in the past?

Does this constitute financial injury to the bank or to the customers?
Rule 1.6
: CONFIDENTIALITY OF INFORMATION
Full transcript